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YouTube’s about-face on originals has analysts reassessing the state of streaming.

Frank Küler

Photoillustration By Todd Reublin

William Zabka as Johnny Lawrence in Cobra Kai

To some in the TV industry, YouTube's decision in November to pull back on original series — and move the originals it still produces out from behind its paywall — was a sign that peak tv had finally arrived. But the reality is more complicated.

YouTube had been steadily ramping up its ability to produce professional-grade content since 2012, intending to mix a subscription model into an ad-supported juggernaut built around the work of its global army of young amateur "makers."

Under the direction of veteran TV executive Susanne Daniels, YouTube Originals produces such notable shows as Cobra Kai, the Karate Kid spinoff that reunites Ralph Macchio and William Zabka as martial arts rivals Daniel LaRusso and Johnny Lawrence, now middle-aged. Also on the slate is the thriller Impulse, executive-produced by Doug Liman (Swingers, Suits).

Looking ahead, YouTube Originals recently ordered pilots for the Ben Stiller–produced neo-noir thriller Dark Cargo, as well as the Jordan Peele– produced anthology Weird City and On Becoming a God in Central Florida, which stars Kirsten Dunst.

"You're probably not going to see us spend that level of money for a Game of Thrones or a comparable series like Westworld. But I've always been a believer that you can make great shows for less money, and that it's not the episodic spend that makes something great," Daniels said, defining YouTube's level of ambition last summer at a Television Critics Association gathering.

But late last year, around the time the Dark Cargo pilot order made news, it was announced that the YouTube Originals budget had been significantly reduced, and that the remaining Originals would soon move to the free, ad-supported YouTube environment.

Producers told The Hollywood Reporter, which first broke the news, that YouTube had stopped commissioning additional new shows, having been unable to "find traction" with scripted programming.

This came about six months after Google reconfigured and rebranded YouTube Red, the subscription service that had housed its premium original shows. What remained was the $9.99-per-month YouTube Music service and the $11.99-per-month YouTube Premium, which gave users exclusive access to YouTube Originals shows.

"As we look to 2019, we will continue to invest in scripted programming and shift to make our YouTube Originals ad supported to meet the growing demand of a more global fanbase," YouTube announced in a November statement. "This next phase of our originals strategy will expand the audience of our YouTube Original creators, and provide advertisers with incredible content that reaches the YouTube generation."

YouTube chief business officer Robert Kyncl told the Reporter the company was merely pausing its expansion of originals as it transitions from a subscription-based model to an ad-based model.

Analysts who track the streaming video market were unsurprised. With the annual production budget for YouTube Originals reportedly in the hundreds of millions, analysts had long doubted Google's commitment to truly compete against the likes of the market's biggest spender, Netflix, which reported a content budget of $8 billion in 2018.

"Google's unwillingness to make larger investments over the long term meant that executives could not afford to make big bets on the type of content that could have had a real impact, thus YouTube Red/Premium was easily overshadowed by Netflix, Hulu and Amazon," says Brad Schlachter, senior adviser to The Diffusion Group, a research company focused on the over-the-top streaming business.

"A move like this speaks of a lack of return behind the paywall," adds Brett Sappington, senior analyst for research company Parks Associates. He notes that Google never released subscriber numbers for YouTube Premium.

"YouTube has a sunk investment in these originals, and they appear to believe that they will make more money off them in their ad-supported space. It doesn't mean that YouTube Premium is doomed, but it is certainly not a good sign."

Nor does it seem a good sign for the broader streaming video business when a platform that averages 1.9 billion users a month worldwide can't sustain a subscription platform.

"While YouTube has experienced staggering growth, and their brand has become ubiquitous, it is also strongly associated with being a destination for free, short-form video," Schlachter says. "This established legacy made it challenging for them to pivot to a premium, paid player in the originals space."

YouTube declined to explain the latest pivot. However, speaking in Las Vegas at the CES Show in January, YouTube chief product officer Neal Mohan conceded, "We're primarily an advertising-supported business." YouTube, he said, provides "a great way for advertisers to reach really engaged viewers."

And with YouTube's makers uploading 400 hours of video onto the platform "every minute of every single day," Mohan explained that the primary job of YouTube's managers is to curate all that content, developing search and discovery technology that most effectively matches viewers with videos. "The amount of recommendations we drive has grown ten-X in the last three years," he said.

So, by all accounts, it appears that YouTube — arguably the biggest streamer in the world — is pulling back from the original-series arms race. What does that say about the state of television? Have we reached the end of the original series boom?

Sappington doesn't see YouTube Originals as being sufficiently relevant to signal any broader industry trend. "I'm not sure that I even believe in the theory of Peak TV, per se," he says. "It assumes an overabundance of good content, and I am not sure that all of the original content being produced qualifies. I believe that there will always be ample opportunity to monetize good content."

It's one thing for YouTube to cut back on its original-series business. It would be quite another thing if Netflix or HBO suddenly decided to pare back their shows. That's not to say YouTube Originals haven't moved the leadership needle.

In October, the Cobra Kai production team put out a joint tweet saying that the series' first episode had been viewed 50 million times since its May premiere. Streaming metrics are tough to come by and can be hard to interpret, but that's impressive.

It's a bit of an apples-to-oranges comparison, but consider that number in light of the attention Netflix received when it announced that Bird Box, its Sandra Bullock-led horror/sci-fi film, was streamed by 45 million accounts in its first seven days of availability. (Less than three weeks later, Netflix updated that number to 80 million.)

Whether it's originals or user-generated content, few should be surprised that YouTube is able to generate a mass audience.

What's questionable is its ability to generate paying subscribers from its viewership, much of which is younger than 18 and doesn't even have a credit card. Not only has YouTube not disclosed a subscriber count for YouTube Premium, it's also unknown just how many subscribers are attached to YouTube TV, the virtual pay-TV platform.

These days, streaming video seems to be moving away from the subscription model. A belief has swept the industry that customers are overwhelmed by monthly subscription bills.

"The idea that the average household is going to subscribe to Netflix, Hulu, Amazon, HBO Plus and YouTube Premium, all at the same time, is ludicrous," says Farhad Massoudi, founder and CEO of ad-supported streaming platform Tubi. "The average household has an income of around $54,000 a year. They're not paying $8 for avocado toast."

Kelly Campbell, chief marketing officer for Hulu, is among the many streaming executives who see the industry shifting to an ad-supported model. (In January, Hulu dropped the price of its entry-level subscription from $7.99 a month to $5.99; a week earlier, Netflix increased its standard plan from $10.99 to $12.99.)

Over the past decade, video services largely developed subscription models, assuming that millennial-rich audiences wouldn't put up with the commercial clutter of their parents' linear television experience.

But viewers from the post-millennial "Generation Z," who have grown up on Netflix, have never really been forced to sit through 10 minutes of commercials to get through 20 minutes of basic-cable content. Campbell says Gen Z "has grown up in an IP–powered universe. And they're a lot more receptive to advertising."

So, while migrating to the free, ad-supported paradigm makes sense for YouTube, controlling its originals' budgets is probably rooted in sound business practice.

For most of the so-called FAANG companies — Wall Street's acronym for Facebook, Amazon, Apple, Netflix and Google — economic models for original shows vary, since they serve multiple business purposes that may not be so apparent to the bottom line.

Amazon, for example, is less concerned about the subscription revenue directly generated by The Marvelous Mrs. Maisel than it is with fostering what it calls "platform engagement." You may not buy Midge Maisel's hat while watching (yet), but if you've paid for Amazon Prime to watch the show, you've helped Amazon's subscriber numbers and you're likelier to buy something there.

For its part, Netflix is trying to expand a global subscriber base. A show like Stranger Things might lose buzz in the U.S., but if the service wants to keep expanding in Germany, where Stranger Things is its ninth-most-popular program, it's not going to cancel the show.

But Facebook also has the broader agenda of getting users more engaged in its social media platform. It's less concerned with the specific audience performance of Jada Pinkett Smith's talk show, Red Table Talk, than it is with the overall goal of getting users to spend more time interacting on Facebook.

Google had been focused on growing YouTube Premium. But with that subscriber quest having gone awry, YouTube's business goals seem to have evolved into objectives more typical of traditional linear television: get as many folks as possible to watch a show and monetize it with advertising.

And to achieve that goal for YouTube Originals, there is probably no better platform than one that reaches 1.9 billion users a month.

"Ultimately, the company realized that its originals were better monetized via a free, ad-supported network supported by big advertisers," Schlachter says. "Subscription revenue takes time to build, even with strong programming, and YouTube was not willing to put in the money or the time to grow an audience."